Income - Tax Enforcement With a Self - Interested Auditor ¤

Practical problems of income tax enforcement are characterized by the fact that auditing of tax payers has to be done by employees of the enforcement authority who may not be motivated to act in it's best interest. We study a form of auditor moral hazard, where the auditor can shirk on his auditing e®ort and claim to have found no evidence of irregular behavior of tax payers. This would make him ine®ective as an enforcement instrument. Within a game-theoretic framework, we study a simple incentive scheme that motivates the auditor to properly investigate income tax ̄les. We demonstrate that such a scheme can lead to a complex interaction between auditor's and tax payer's incentives and that it might be hard for the authority to achieve e®ective enforcement in this way. We argue that the economics of income tax enforcement might therefore be a case, where other forms of motivation than direct monetary incentives are particularly relevant.